Released on March 20, 2002
(Next Release on March 27, 2002)

The “Circle of Life” in Petroleum Markets
As gasoline prices rise once again, many consumers have been asking, “What’s going on?” But as is often the case, the simplest questions don’t always have the simplest of answers. However, by looking at the cycle petroleum markets go through, we can hopefully understand a little more about what is currently happening.

Petroleum markets, like most commodities, run in cycles (see figure). Last summer, refineries were operating at very high levels, as product stocks were low, demand was high, and prices encouraged more supply. As we moved into the fall, particularly after the attacks on September 11, demand for most products dropped and stocks of all the main products (gasoline, distillate fuel, and residual fuel) increased. As supply for these products outstripped demand, prices fell and refinery margins (the difference between spot prices for petroleum products and the cost of the crude oil used to make them) also fell. With ample inventories for most products and very little economic incentive to make more product due to the weaker refinery margins, refiners naturally cut back on the amount of crude oil they were running through their refineries. When margins are weak, it is an excellent time for refiners to perform routine maintenance on their refineries. This is the portion of the cycle that we began sometime last month. In the next phase of the cycle, however, cuts in refinery production will put an increased emphasis on inventories to keep pace with demand. As demand picks up again, petroleum product inventories will fall. We see this happening now in gasoline, as gasoline inventories have fallen more than 8 million barrels in the last 5 weeks. This may occur with other products as well, as the economy is expected to recover. Then, as product inventories are drawn down, prices typically rise, thus increasing refinery margins, which encourage more refinery production, and we find ourselves back where we started. While this cycle generally gets repeated, the timing of the cycles can vary, and thus it is difficult to know when the next phase is coming. However, it does appear that petroleum product inventories are generally falling, thus putting near-term pressure on prices.

Retail Gasoline Prices Up Strongly for Third Week
EIA’s latest weekly gasoline price survey, released on March 18, showed the average U.S. retail price for regular gasoline increasing 6.5 cents to 128.8 cents per gallon, the highest price since October 15, 2001. The national average price has now risen 17.2 cents per gallon in the past three weeks, the second largest increase over a 3-week period since EIA began our weekly survey in August 1990. If the average price for regular gasoline rises more than 4.3 cents per gallon on March 25, it will be the largest 4-week price increase we have ever seen in our survey.

Average retail gasoline prices were relatively flat nationally through January and February, and actually declined slightly in the Midwest, but prices in California rose more than 20 cents per gallon during that period. During the past 3 weeks, the strongest gains have been in the Midwest (21.6 cents) and California (19.4 cents), while prices on the East Coast have risen 14.5 cents per gallon. The increases appear to reflect a variety of factors, including rising crude oil prices, seasonal pressures, declining inventories, and refinery problems in some areas. While EIA does not forecast a return to gasoline prices as high as those seen the last two years, the seasonal increase has begun somewhat earlier than usual, and is expected to continue over the coming weeks.

Retail diesel fuel prices rose by 3.5 cents per gallon last week, to a national average of 125.1 cents per gallon as of March 18. The increase in diesel fuel prices over the past 3 weeks (9.7 cents) has been much less than that for gasoline, reflecting higher inventories and a different seasonal demand pattern.

Residential Heating Oil Price Increases
Crude oil price increases, along with recent stock draws, continued to push residential heating oil prices higher this week. The residential heating oil average for the final 2001/2002 heating fuels survey showed an increase of 1.4 cents per gallon, moving from 116.8 to 118.2 cents per gallon. The average residential price remained 22.5 cents below its posting for the same period one year-ago. Residential propane prices, on the other hand, remained relatively stagnant, dropping 0.1 cent, from last week’s posting of 112.1 cents to 112.0 cents per gallon, 27.7 cents below the March 19, 2001 mark. The 2002/2003 heating fuels price survey will begin on October 7, 2002.

Propane Market This Winter - A Tale of Two Stories
The late season draw on U.S. inventories of propane continued last week, but at a much slower pace compared with recent weeks. U.S. inventories of propane stood at an estimated 39.8 million barrels as of the week ending March 15, 2002, a modest 0.3-million-barrel decline from the prior week. With the end of the heating season near, the potential exists for U.S. inventories of propane to end March 2002 at the highest level in 15 years. However, what was interesting about the propane market this winter was the stark difference in stock draws between the first and second half periods. Relatively mild weather contributed to a moderate draw in the first half of winter (October through December), less than one million barrels, a record low for the period. But rebounding chemical sector demand for propane contributed to boost the second half (January through March) stock draw by about one-third higher than the average of the past 5 years. Thus, while propane inventories are likely to end the winter much higher than in recent years, without a larger stock draw than normal in the second half of the winter, inventories would have been even higher.

Crude Imports Remain Low
Although crude oil imports increased to 8.4 million barrels per day for the week ending March 15, they still remain much lower than usual for this time of year. Over the most recent 4-week period, crude oil imports have averaged 8.2 million barrels per day, or nearly 0.8 million barrels per day less than the same period last year. With cuts in production from OPEC and other major producing countries, as well as decreased exports from Iraq, the decline in U.S. crude oil imports was not unexpected. However, as we enter the part of the cycle in which refinery margins improve and thus lead to higher refinery runs, will refiners import more crude oil to supply their refineries or will they initially draw down crude oil inventories? If they choose the former, crude oil prices could rise as refiners bid for a smaller pool of oil. If they choose the latter route, crude oil stocks will fall, thus putting increased pressure on crude oil prices. How the crude oil market is balanced this spring/summer will be a key factor in determining the timing of any increase in crude oil prices.